AFR: THE RIGHT INCENTIVES WILL ENSURE THAT OUR R&D MEANS BUSINESS – ARTICLE

Mr Bill Ferris AC, Dr Alan Finkel AO and Mr John Fraser conducted a review into the Research & Development Tax Incentive that was released on 26 September 2016. They published an op-ed in the Australian Financial Review on 26 October.

Almost all sides of politics here in Australia, and globally, accept that research and development is essential to economic growth and new job creation.

The Australian government invests about $10 billion each year in programs for research, science and innovation that are vital to our future prosperity.

The R&D Tax Incentive accounts for roughly 30 per cent of the total allocations, which in turn is over 90 per cent of Government support for business R&D.

This is the context in which the government, as part of the National Innovation and Science Agenda (NISA) announced in December, requested that we complete a review of the Incentive to assess its additionality, effectiveness and integrity. In the context of the review, we interpreted “additionality” as R&D activities that businesses would not otherwise undertake.

We took the view that in a high-volume, self-assessment tax incentive program such as this it is important to provide current and future governments with confidence in the scheme’s ultimate sustainability and continuity. The recently legislated 1.5 per cent reduction in the rate of the tax offset component of the Incentive was government policy prior to our review and thus outside its scope.

In our report to government, colloquially known as the “3F’s Review”, we concluded the Incentive was good but not great. We found that its sustainability as the government’s main driver of business R&D was dependent on (i) achieving greater additionality, and (ii) clarification of guidelines and reduction of compliance costs.

We made six recommendations and are pleased that, in September, the government released the report, inviting comments and submissions.

Any review of this nature will attract commentary on “winners” and “losers”. In our view, much of this commentary overlooks the intended operation of the recommendations as a suite. In particular, attention has focused on the proposed $2 million cap on the refundable component, being cash refunded to companies with turnover below $20 million.

A few points should be made.

First, the refundable component of the Incentive accounts for almost three quarters of the entire annual subsidy of approximately $3.2 billion. The refundable component has grown from $1.4 billion in 2011-2012 to an estimated $2.3 billion for 2016-2017.

Second, the proposed $2 million cap would affect only companies spending more than $4.6 million a year on eligible R&D. It is estimated that fewer than 1 per cent of companies would experience reduced support.

Third, those companies that exceed the $4.6 million in annual R&D expenditure would still receive an Incentive benefit for that spending above the cap, in the form of a non-refundable tax offset that can be carried forward to offset tax liabilities in future years.

Fourth, the rules for early-stage venture capital partnership structures have been significantly improved, and tax incentives for angel investors have been established. When taken together with the refundable component of the Incentive, we believe the government support for start-ups and early-stage enterprises is among the most generous in the world.

Fifth, and especially relevant to the biotech and medtech companies dealing with time and dollar intensive clinical trials and regulations, the government is establishing a special $500 million Biomedical Translation Fund (BTF). The BTF is a co-investment fund subscribed $250 million by the Government and matched by private sector funding of at least another $250 million. This for-profit fund will provide risk capital to companies seeking to commercialise their biomedical products and services globally.

During our consultations the value of collaborative business research undertaken in publicly funded research institutes was highlighted. In consideration of this we recommended an additional tax offset of up to 20 per cent on collaborative R&D expenses for companies larger than $20 million in turnover. This is designed to encourage more companies to reach into our universities, medical research institutes and the CSIRO. This premium would also apply to the cost of employing PhDs and postgraduate researchers in their first three years, thereby strengthening the links between our universities and companies. Only 30 per cent of Australia’s researchers are employed by business. This is well behind most of our OECD competitor countries, for example Germany at 60 per cent.

Spillover effects from R&D, that is benefits accruing to the wider economy, have been shown to be significantly higher with large company participants.

Our recommendations for larger companies would require some demonstration of “skin-in-the-game” via an R&D intensity threshold of 1-2 per cent of total business expenditures prior to eligibility for tax offsets, but would also double from $100 million to $200 million the maximum amount of eligible R&D expenditure above the threshold in any one year.

These recommendations aimed to ensure that R&D intensive companies continue to do their research here, not offshore; or are attracted to bring new investment to Australia.

Importantly, we expect that, if accepted, the recommended changes to the Incentive would encourage Australian businesses to go as far as they can beyond “business as usual” to bring breakthrough products and processes to market.

Mr Ferris is Chair of Innovation and Science Australia, Dr Alan Finkel AO is Chief Scientist and Deputy-Chair of Innovation and Science Australia and Mr Fraser is the Secretary to the Treasury.